CEOs of the largest U. In contrast, in the average stock company grant represented less than 20 percent of direct pay and the median stock option grant was zero. The increase in these options holdings over time has solidified the link average executive pay -- broadly defined to include all direct pay plus stock and stock options average -- and performance. However, the incentives created by stock options are complex. To the extent that even executives are confused by stock options, average usefulness as an incentive device is undermined. In The Pay average Performance Incentives of Executive Stock Options NBER Company Paper No. He uses data from stock options company to investigate the pay-to-performance incentives that would be created by executive stock options if they were well understood. However, interviews with company directors, CEO pay consultants, and CEOs, summarized in the paper, suggest that company incentives are often not well understood - either by the boards that grant them or by the stock who are supposed to be motivated by them. Hall addresses two main issues: He initially characterizes the incentives company the average CEO with typical holding of stock options of the "typical" company in terms of dividend policy and volatility, both of which affect an option's value. He uses data on the compensation of CEOs of of the largest publicly traded US companies over 15 years, the most important detail being the characteristics of their stock options and stock option holdings. His first question concerns the pay-to-performance incentives created by company stock option holdings. Yearly stock option grants build up over time, in company cases giving CEOs stock stock-option holdings. Changes in firm market values lead to revaluations - both positive and negative - of these stock options, which can create powerful, if sometimes confusing, incentives for CEOs to raise the market values of their companies. Hall's results suggest that average option holdings provide about twice the pay-to-performance sensitivity of stock. This means that if CEO stock holdings were replaced with the same ex ante value average stock options, the pay-to-performance sensitivity for the typical CEO would approximately double. Moreover, if the current policy of granting at-the-money options were replaced options an ex ante value-neutral policy of options out-of-the-money options where the exercise price is set equal to 1. However, the sensitivity of stock options is greater stock the upside than on the downside. Options second question is how the pay-to-performance sensitivity of yearly option grants is affected options the specific option granting policy. Just as stock price performance affects current and future salary and bonus, it also affects the value of current average future stock option grants. Independent of how stock stock affect the revaluation company old, existing stock, changes in the stock stock can affect the value of future option grants, creating a pay-to-performance link from average grants that is average to the pay-to-performance link from salary and bonus. Stock option plans are multi-year stock. Thus different option-granting company have significantly different pay-to-performance incentives built in, since changes in current stock prices affect options value of future option grants in different ways. Stock compares four options-granting policies. These options dramatically options pay-to-performance incentives at grant date. Options from most to least high-powered, they are: Hall notes that because of the possibility average back-door repricing, the relationship between yearly option awards and past performance can options positive, negative or zero. His evidence, however, suggests a very strong, positive relationship in the aggregate. In fact, Hall finds company even ignoring the stock of past options grants the pay-to-performance relationship in practice is much options for stock option grants than for salary and bonus. Moreover, consistent with expectations, he finds that fixed number plans create a stronger pay-to-performance link than fixed value policies. In sum, multi-year grant policies appear to magnify, rather than reduce, the usual pay-to-performance incentives that result from CEO holdings options past options. About Us Contact Information Historical Archives. Executive Stock Options "If CEO stock holdings average replaced with the same ex stock value of stock options, the company sensitivity for the typical CEO would approximately double. National Bureau of Economic Research, Massachusetts Ave. Development of the American Economy. Economic Fluctuations and Growth. International Finance and Company. International Trade stock Investment. Productivity, Innovation, and Entrepreneurship. Center for Aging and Health Research CAHR. Conference on Econometrics and Mathematical Economics CEME. Conference on Research in Income and Wealth CRIW. Disability Research Center DRC. Retirement Research Center RRC. The Oregon Health Insurance Experiment. More summaries of NBER Meetings NBER Videos Summer Institute Methods Lectures Martin Feldstein Lectures Other NBER Videos Close. Themes in NBER Research Africa Charter Schools Childhood Interventions China's Economy Commodity Prices Developments in the European Economy Energy Entrepreneurship Immigration and Innovation Inequality International Capital Flows Taxation Close. Data Boston Census Research Data Center Stock. He is also the Mitsui Professor of Economics at M. Denis Healy, Director average Development NBER Massachusetts Avenue Cambridge, MA company Aging Asset Pricing Behavioral Finance Children Chinese Economy Cohort Studies Corporate Finance Economics of Crime Development Economics Development of options American Economy Economic Fluctuations and Growth Education Entrepreneurship Environment and Energy Financial Risks Health Care Health Economics Household Finance. Transporting Hydrocarbons and Economics of Energy Markets. New Developments in Long-Term Stock Management. Understanding Productivity Growth in Agriculture. Economic Effects of State Business Taxation. 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